Value Pick 2 : Mac Charles (India) Ltd

Note : SOLD ALL Holding  with no loss and no profit . No more interested in this type of companies.

I got idea of Mac Charles (India) Ltd , when I was going trough research report of CRISIL on “Navin Fluorine International Ltd” and “Savera Industries Limited” .  Savera has already moved up lot so I skipped it  . Navin Fluorine looked good and cheap at first glance , but after analyzing annual report I felt probably minority shareholder was taken on ride by promoter. This is Mafatlal group of company. Company has invested in group companies and written off some of amounts. If a company invest or give unsecure interest free loan to group companies(not subsidiary company) then promoter does not lose anything , but what minority shareholder get in return? Write – off ? CRISIL is number 1 research credit ratings organization in india , we expect from CRISIL to provide detail regarding prompters attitude toward minority shareholder , mainly corporate governance track record. In case of Navin CRISIL has mentioned “As part of the scheme of rehabilitation of the BIFR, Navin was mandated to settle the secured liabilities of MIL. Navin has also advanced money from time to time to settle working capital and other secured liabilities of MIL. However, as of March 2010, all the secured liabilities have been settled by Navin, inter-company advances to group companies are decreasing and we believe they are likely to be discontinued “ But not mentioned what minority shareholder lost and gain because of scheme of rehabilitation till date .

           Come back to my pick Mac Charles (India) Ltd  .  Mac Charles (India) Ltd is nothing but Hotel Le Meridien of Banglore .

Company Background :- Kapi Investment Inc Limited is the holding  company of Mac Charles (India)  Limited. Promoter group holds almost 75 % equity .Mac Charles (India) Ltd had signed the franchise agreement with Le  Meridien in 1997 .

Category      :-  5 Star

Access            :- 32 kms from New International Airport, 2 kms from City Railway Station, 2 kms from Majestic Bus Stand.

Total rooms & suites – 195 (Deluxe – 55, Executive suites - 8, Deluxe suites - 3, Le Royal Club rooms – 110 & Le Royal Club suites - 19).

Banquet halls :-

·        The Orchid

·        The Dominion

·        Embassy

·        Utsav

·        Senate

·        Coronet

Mac Charles (India) Ltd regularly acquired/invested in hotel and other properties like Bramha Bazaz Hotels Ltd (2001) , Vaswani Properties Pvt. Ltd and Vaswani Investments and Holdings Pvt. Ltd (2002).

Last year Mac Charles (India) Ltd has invested 100% share capital (Rs 7.45 cr) in Messrs. NEDSTAR HOTELS PRIVATE LIMITED (presently known as AIRPORT GOLF VIEW HOTELS & SUITES PRIVATE LIMITED) , which is now100% subsidiary company of Mac Charles Ltd. Get more detail of GOLF view from http://golfviewhotelsuites.com/index.html . Deal looks bit expensive considering AIRPORT GOLF VIEW is not profitable but I believe qualified, efficient & experienced management of Mac Charles (India) Ltd will make it profitable soon.

Mac Charles had 3.0 MW (1.50 MW each ) Wind Turbine Generators which generate electricity of about 1.15 crore units p.a. of green power which is being partially utilized for captive consumption of the Hotel and the balance units generated is being sold to Govt. of Karnataka. This existing Wind Turbine generated revenue around 2 cr in the last year . Mac Charles (India) Ltd has commissioned additional 2.10 MW Wind Turbine Generator on 30.03.2010 , which will start generating revenue from current fiscal . So, total current capacity of Mac Charles (India) Ltd is 5.10 MW. This additional capacity will generate additional revenue of around 3cr/year with some tax benefits (Karnataka gives 5 year tax holiday) for Mac Charles (India) Ltd.

Why Value Buy: - At closing price of 245.65 on 3^rd  dec 2010 , market cap of Mac Charles (India) Ltd is around 162 cr . Mac Charles (India) Ltd has investment value around 91 cr in MF and stocks on 31^st  March 2010. List of stock is too long , you can get complete list from annual report of Mac Charles (India) Ltd. You can download annual report from BSE site . Go to http://www.bseindia.com/bseplus/StockReach/AdvanceStockReach.aspx?scripcode=507836 and now click on "Filing & Other Info" section/tab. Here I am providing list of few stocks with major investment

·                                            ·        Reliance Industries Ltd

·        Sobha Developers Ltd

·        Purvankara Projects

·        Indiabulls Financial Services

Mac Charles (India) Ltd has total current asset of Rs. 77.37 cr (77,36,94,859)  ( inventory 60,02,670 + SUNDRY DEBTORS 1,55,21,941 + CASH 3,33,60,769 + LOANS & ADVANCES(including advance tax) 71,88,09,479)

Mac Charles (India) Ltd has total current liabilities & provisions of Rs. 33.81 cr (33,80,77,907) .

Net Current asset is 43.56 Cr.

Investment + Current Asset is 133.50 Cr.

So we are getting Mac Charles (India) Ltd (which is having 5 star hotel Le Meridien in Banglore spread across 3 acres in prime area, other properties , golf view hotel  and Wind mill which will generate revenue of at least 5 Cr per year and may be expandable)  effectively in less than 30 cr ( 162cr- 133.50cr) . Even company’s average cash flow from operation is 39 cr for last 4 years including recession time.

Additionally, Mac Charles (India) Ltd is having good track record of paying dividend. On current market price of Rs. 245 dividend yield is quite impressive at 4.5 %

Corporate Governance:-

A.

Mac Charles (India) Ltd has entered into an agreement for purchase of immovable property being commercial office space of 58000 sq.ft. with the Developer in Bangalore. Towards this, an advance of Rs.35 Crores has been paid by Mac Charles (India) Ltd. Subsequently, there was a delay in commencement of the project. The above referred agreement entitles the Mac Charles (India) Ltd to take appropriate action with regard to this agreement for which the consent of the developer is deemed to have been given. Accordingly, Mac Charles (India) Ltd relinquished its rights to the extent of 29000 sq.ft. in the previous year for a consideration of Rs.21,22,13,1207- of which a sum of Rs.3,72,13,1207-has already been received by Mac Charles (India) Ltd and during the year Mac Charles (India) Ltd has decided to relinquish its balance rights in the said agreement to the extent of 29000 sq.ft. for a consideration of Rs.23,99,25,000/- of which a sum of Rs.6,49,25,000/- has already been received by the Mac Charles (India) Ltd.

This is red flag for the Mac Charles (India) Ltd and it is real test of prompter’s integrity, since promoters of fraud Indian companies use similar type of to trick siphon -off money from balance sheet. Trick used by fraud Indian promoters is to announce a joint venture (JV) for a new project. After a while, there are reports about differences between the JV partners. The money invested in the JV is never recovered the promoter has already taken back the money in cash and written off the investment in its books. The JV is floated precisely to siphon off money by taking away money invested in the JV.

We don’t need to worry too much about it since Mac Charles (India) Ltd has already received around 10 cr and giving advance is common phenomena in the industry (Indian hotel Ltd. has given more than 700 cr Loans & Advances). Additionally, promoter has stake around 75% . Most of this type of fraud happens , when promoter holding is low . I have confidence on promoter. I only expect from promoter give regular update on this front .They have legal right/agreement to recover remaining amount. If company write off this money, then I will not hesitate to out of this counter. I had not found any major write off in annual reports of last few years .We need to keep eye on this event same time we should not prematurely consider promoter of Mac Charles (India) Ltd guilty of wrong doing only because of other fraud Indian companies did similar trick. I am just providing 360 degree view on this company, which is generally missed in broker’s research reports.

            If promoter passed this test and Mac Charles (India) Ltd receives remaining amount, then we are getting decent promoter, very good business, and very good dividend yielding company at mouth watering price or almost free of cost.

            B.

Mac Charles (India) Ltd has granted an unsecured loan of Rs. 2.3 cr to its wholly owned subsidiary without proper agreement. Even though, it is wholly owned subsidiary proper agreement is always prescribed.

Fair Price Theory:-

            Let us assume you are owner of this company Mac Charles (India) Ltd and somebody comes to you and wants to buy this whole company for just 162 cr . Will you sell at that price? What will be your response? I believe you will say, see boss I have investment of 91 cr , NCA of 43.50 cr . So, effectively you want to get my company Mac Charles (India) Ltd for only 30 cr .  We have total land at cost of 33 cr , which we have acquired in last 30 years, current value should be many folds . You know from last 8-10 years how much land prices appreciated.  Our Hotel Le Meridien of banglore is spread across 3 acres (1,30,680 sq ft) in prime areas . You can get current value of only land of Hotel Le Meridian by multiplying current rate to 1,30,680 if you know current rate in Bangalore (Indian silicon valley) . Do you have idea of Banglore and hotel industry? Ask who has idea about Banglore and hotel industry, then you can value our Hotel Le Meridian .

            We don’t have to pay electricity bills, since we have our own Wind Turbine Generators with capacity of 5.10 MW. It will give us revenue of 5cr / year with nominal operating cost and tax ( 5 year tax holiday in karnataka) will boost bottom line. Even in conservative estimate for setting up Wind Turbine Generators of 5.10 MW will cost you more than 30 Crores . Have you seen my cash flow from operating activities of Mac Charles (India) Ltd? Our cash flow is  64.33 , 23.92  ,31.94 and 37.07  crores  for Last four years.

Note :- This stock (Mac Charles (India) Ltd) has market lot of 50 instead of normal 1 . It means we can buy stock in bunch of 50 , 100 , 150 ............


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